FISCAL INCONSISTENCIES AND HIGH INFLATION

This paper presents a simple model of steady-state inflationary financ ing. The discrepancy between the target level of spending and a (fixed ) taxing capacity indicates the degree of fiscal pressures; this varia ble need not be monotonically related to the measured deficit, since a ctual expenditures are endogenous. Large fiscal inconsistencies genera te unique steady states located on the 'bad' side of the inflation-tax Laffer curve. There, high inflation may coexist with low observed def icits, and the revenue constraint results in 'repressed spending'. Suc h situations correspond qualitatively with the loss of control over fi scal policies typical of high inflation economies.